What is Share Capital in Business?

Share capital is one of the ways that some of the world’s largest businesses were able to raise money to reach their current market position.

What is share capital?

Let's find out.

Understanding Share Capital

Share capital allows companies to raise money by issuing either preferred or common stock to an investor. Businesses report this figure on their balance sheets under the shareholder equity section on the sheet.

Multiple lines on the balance sheet may show share capital, including:

• Common stock
• Preferred stock
• Paid-in capital

While the stock may be sold in multiple ways, the only way that share capital is purchased is directly from the company itself. The company must receive the funds directly for it to count as share capital.

If, for example, you purchase 100 shares of Amazon today, this is not considered share capital if it’s purchased from another shareholder that bought the stock after the business’ IPO.

Definition and Types of Share Capital

A business share capital definition is: money a company raises by issuing its common or preferred stock. On an accounting basis, you’ll find a few share types, by definition, that may be listed:

Authorized Share Capital

“Authorized share capital” is defined as the number of shares that can be sold off to raise money. Companies must seek permission to sell stock and outline:

• Total amount of equity that the company must raise
• Base share value

Authorized capital is the total capital a company can raise by selling its share capital. If you want to raise $10 million, you can, but it must be authorized. For example, if you have permission to raise this amount, it is irrespective of the value of the stock.

You would sell 1 million shares at $10 or 10 million at $1, but you cannot raise more than the $10 million of authorized share capital.

Issued Share Capital

On top of authorized capital, there is also “issued share capital.” What does this mean? This is the: value of the shares the company agrees to sell to investors.

Share Capital on a Balance Sheet

Company balance sheets show a lot of information, and share capital is one of the items on your sheet, too. Share capital is also known as “par value” of your equity securities. Since the value may vary based on the definition, it’s crucial to see an example:

• Company A sells 10,000 shares of stock
• Stock par value is $1

You might assume that the share capital was $10,000, but this may not be the case. Par value, often $1 or less, doesn’t always reflect the actual value of the stock. The stock may have sold for $10 a share, raising $100,000 in the process.

On your balance sheet, your accountant may include the following line items:

• $10,000 in share capital
• $90,000 ($100,000 - $10,000) in paid-in capital

Reading through a company’s balance sheet will help you determine if the business has sold share capital or not.

Importance of Share Capital

Share capital is important if you want to raise money by selling shares in your business. You'll lose some equity and potentially need to pay dividends to shareholders. There are many advantages to using share capital to raise funds:

• The business does not have to take out a loan to raise capital
• No lender requirements exist to raise funds
• Interest payments do not exist
• Funds raised through the sale of share capital can be used for anything

Raising Funds

Share capital allows companies to raise money to:

• Expand their operations, generating more revenue and the potential to attract a higher market share
• Invest in new opportunities, such as acquiring another company or funneling money into new products or services
• Maintain enough capital to keep operations running, raising working capital in the process

However, raising capital using this method is not without its disadvantages. For example, you may give up some control in the company through issuance. Most owners and founders will not allow enough shares to be issued that they lose control over the company.

Shareholders will have rights within the company since they own a small portion of the company in stock.

If a single shareholder does accumulate a majority of the company’s shares, they can take a controlling vote in the company and dictate its future. Depending on the shares and agreements in place, you may have to pay dividends back to the shareholders.

You may also engage in stock buyback, which is a way to repurchase stock and regain control of the company and not need to continue paying dividends to shareholders.

Shareholders do want to have higher value for their investments and will need to be updated on the company’s financials and operations.

Financial Stability and Creditworthiness

Share capital is the money raised by a company by issuing preferred or common stock, so it directly impacts the business’s financial stability.

The money raised from the issuing of stock can be used to pay debts, cover expenses, pay staff and continue operations. In short, it contributes to the company's financial stability. Having more capital can also help improve the business’s creditworthiness.

Share Capital and Ownership

Share capital plays an integral role in a company’s ownership and decision-making. It’s important to understand the relationship between share capital and ownership.

Relationship Between Share Capital and Ownership

Share capital determines ownership and control within a company. When a stakeholder holds at least 50% of outstanding shares in a company, they gain controlling interest, or have the ability to control the corporation’s decisions.

Equity and Share Capital

Share capital is the portion of the company’s equity raised from issuing preferred or common shares. It differs from other types of equity.

Conclusion

Share capital plays an important role in business. The money raised from issuing preferred or common stock can help improve a company’s financial stability and creditworthiness, raise funds and more. It directly affects ownership and equity as well.

Because it plays such a crucial role in a business’s finances, share capital should be well-managed to support financial growth and health.